Merchant Banking

Indian Financial System An

Overview
FUNCTIONS
Collection of SAVINGS & Distribution for
INDUSTRIAL INVESTMENT.
Stimulating CAPITAL FORMATION &
ACCELERATING THE ECONNOMIC GROWTH

STRUCTURES
1. Regulatory Bodies
(RBI/SEBI/IRDA/PFRDA)
2. Financial Intermediaries
3. Financial Markets
4. Financial Assets / Instruments
5. Financial Services
Indian Financial System
 Indian Financial System An Overview
ORGANISATION Financial System consists of

What they do Who They Are

Financial Intermediaries (a) Collect Savings

(b) Issue claim against themselves Banks, NBFC,
(c) Use Funds, thus raised, to purchase MF insurance
ownership or debt-claims organisations
etc.

(ii) Financial Markets (a) Not a Source of funds Call Market

(b) Act as a facilitating organisation and link T-Bill Market
saver & investor CP-Market
(c) Based on nature of work they are classified
as (1) Money Market (2) Capital/Security Stock Exchange
Markets.

(iii) Financial Asset/Instrument/ (a) Financial Product innovation

Shares, Debt
Security (b) Three broad categories Instruments
(1) Direct/Primary e.g. Share, Debt., Debentures etc.
Pref. Share etc.
(2) Indirect MF, Security Receipts,
Securitized Debt Investment.
(3) Derivatives Forward, Future, Options.
5
 Indian Financial System An
Overview
Orderly mechanism & structure in
economy.
Mobilises the monetary resources/capital
from surplus sectors.
Distributes resources to needy sectors.
Transformation of savings into investment
& consumption.
Financial Markets Places where the
above activities take place.
6
 Merchant Banker
Definition (SEBI)
merchant banker means any
person who is engaged in the
business of issue management either
by making arrangements regarding
selling, buying or subscribing to
securities or acting as manager,
consultant, adviser or rendering
corporate advisory service in relation
to such issue management.
 Merchant Banking
Merchant Banking, as a commercial activity,
took shapein India through the management
of Public Issues of capital and Loan
Syndication.
It was originated in 1969 with the setting up
of the Merchant Banking Division by ANZ
Grindlays Bank.
The main service offered at that time to the
corporate enterprises by the merchant banks
included the management of public issues and
some aspects of financial consultancy.
 Merchant Banker
From the foregoing, the main characteristics that
still distinguish the merchant banking business
can be described:

1. Reputation, credibility and trustare the

hallmarks of a merchant banker

2. A merchant bankerrarely invests his own

funds. If at all, it is only for a short duration.

3. Merchant Banking isessentially a fee based

business.
 As the scope of what constituted
business expanded, the products a
merchant banker dealt with
increased
At this point, the termInvestment
Bankingcame into being, thus
reflecting the divers activities that
erstwhile merchant bankers took up
 Importance of Merchant
Banker
Economic development need for
funds for corporate demand for
funds
Huge public saving untapped
Merchant banker can play highly
significant role in mobilizing funds of
savers
 Role of Merchant Bankers
Merchant bank have a crucial role to play in India.
Growing complexity in rules and procedures of the government.
Growing industrialization and increase of technologically
advanced industries.
Need for encouragement of small and medium industrialists,
who require specialist services.
Need to develop backward areas and states which require
different criteria.
Exploring the possibility of joint ventures abroad and foreign
market.
Growth in M&A
Promoting the role of new issue market in mobilizing saving
from.
 Functions
Corporate counselling
Project counselling
Pre-investment studies
Capital restructuring
Credit syndication and project finance
Issue management and underwriting
Portfolio management
Working capital finance
Acceptance credit and bills discounting
Mergers, amalgamations and takeovers
Venture capital
Lease financing
Foreign currency finance
Fixed deposit broking
Mutual funds
Relief to sick industry
Project appraisal
 Merchant Banking in India
Grindlays Bank started merchant banking
division in 1967, followed by Citi bank in
1970, SBI in 1972 and ICICI in 1974
Today large no. of banks, FIs and Private
sector Organisations provide Merchant
banking services. Around 189 registered
merchant bankers
Issue management is the dominant
activity among other services
 Merchant Banking in India
Today merchant banking institutions
offer variety of services
Merchant bankers are regulated by
SEBI SEBI Merchant bankers
regulations 1992
 Industry Structure
Institutional base
Banker base
Broker base
Private base
 Problems faced by merchant
Bankers
Industry compartmentalization
Malafide practies
Regulations
 Merchant Banking Regulatory
Framework
SEBI regulates merchant bankers in
India
SEBI merchant Bankers Regulations
1992
 SEBI regulations
Registration
General Obligations
Procedure for inspection
Procedure for inspection
 Registration of Merchant
bankers
An application by a person for grant of a certificate shall be made to the
Boardin Form A.
(a) Category I, that is
(i) to carry on any activity of the issue management, which will, inter
alia, consist of preparation of prospectus and other information relating
to the issue, determining financial structure, tie up of financiers and final
allotment and refund of the subscriptions; and
(ii) to act as adviser, consultant, manager, underwriter, portfolio
manager;

(b) Category II, that is to act as adviser, consultant, co-manager,

underwriter, portfolio manager;

(c) Category III, that is to act as underwriter, adviser, consultant to an

issue;

(d) Category IV, that is to act only as adviser or consultant to an issue.

 Registration of Merchant
bankers
If the applicant wants to act as
underwriter separate registration
under SEBI Underwriters Regulations
1993
If the applicant wants to act as
portfolio manager - separate
registration under SEBI portfolio
manager 1993
 Registration of Merchant
bankers
Conformance requirement
Application should be complete in all
aspects
Otherwise will be rejected

Furnishing of information
Furnishing of further information
 Registration of Merchant
bankers
Consideration of application
Applicant must be a body corporate
the applicant has the necessary infrastructure
like adequate office space, equipments, and
manpower to effectively discharge his activities;
the applicant has in his employment minimum
of two persons who have the experience to
conduct the business of merchant banker;
a person directly or indirectly connected with
the applicant has not been granted registration
by the Board.
Registration of Merchant bankers
the applicant fulfils the capital adequacy
requirement specified in regulation 7;
the applicant, his partner, director or principal
officer is not involved in any litigation connected
with the securities market which has an adverse
bearing on the business of the applicant;
the applicant, his director, partner or principal
officer has not at any time been convicted for any
offence involving moral turpitude or has been found
guilty of any economic offence;
the applicant has the professional qualification
from an institution recognised by the Government in
finance, law or business management;
the applicant is a fit and proper person;]
grant of certificate to the applicant is in the interest
of investors.
 Registration of Merchant
bankers
Capital adequacy requirement minimum networth
required
Category Minimum Amount
Category I Rs. 5, 00, 00, 000
Category II Rs. 50, 00, 000
Category III Rs. 20, 00, 000
Category IV Nil

"networth" means in the case of an applicant which is a

partnership firm or a body corporate, the value of the
capital contributed to the business of such firm or the
paid up capital of such body corporate plus free reserves
as the case may be at the time of making application
 Registration of Merchant
bankers
Procedure for registration.
The Board, on being satisfied that
the applicant is eligible, shall grant a
certificate in Form B
Period of validity of certificate.
Valid for three years
 Registration of Merchant
bankers
Renewal of certificate.
Three months before the expiry of the
period of certificate, the merchant
banker may, if he so desires, make an
application for renewal in Form A.
application of renewal, shall be dealt with
in the same manner as if it were a fresh
application for grant of a certificate
 Registration of Merchant
bankers
Effect of refusal to grant
certificate. - cease to carry on any
activity as merchant banker.
Payment of fees and the
consequences of failure to pay
fee.
pay such fees in such manner and within
the period specified in Schedule II.
If not paid the Board may suspend the
registration certificate,
 General Obligations
1. Code of conduct.
13. Every merchant banker shall abide
by the Code of Conduct as specified in
Schedule III.
Merchant banker not to associate with
any business other than that of the
securities market.
 General Obligations
2. Maintenance of books of account, records etc.

(1) Every merchant banker shall keep and maintain the following
books of account, records and documents namely :
(a) a copy of balance sheet as at the end of the each accounting
period;
(b) a copy of profit and loss account for that period;
(c) a copy of the auditors report on the accounts for that period;
(d) a statement of financial position.

(2) Every merchant banker shall intimate to the Board the place
where the books of account, records and documents are maintained.

(3) every merchant banker shall, after the end of each accounting
period furnish to the Board copies of the balance sheet, profit and
loss account and such other documents for any other preceding five
accounting years when required by the Board.
 General Obligations
3. Submission of half-yearly results.
Every merchant banker shall furnish to the Board half-yearly
unaudited financial results when required by the Board with a
view to monitor the capital adequacy of the merchant banker.

4. Maintenance of books of account, records and other

documents.
The merchant banker shall preserve the books of account
and other records and documents maintained under
regulation 14 for a minimum period of five years.

5. Report on steps taken on auditors report.

Every merchant banker shall, within two months from the
date of the auditors report, take steps to rectify the
deficiencies made out in the auditors report.
 General Obligations
6. Appointment of lead merchant bankers.
All issues should be managed by at least 1 merchant
banker acting as lead merchant banker
7. Restriction on appointment of lead managers.
The No of lead merchant bankers shall not exceed
Size of the Issue No. of Lead MB
< Rs. 50 crores Two
Rs. 50 to 100 Crores Three
Rs. 100 to 200 Crores Four
Rs.200 to 400 crores Five
Above Rs. 400 crores Five or more as per SEBI
 General Obligations
8.Responsibilities of lead managers.
No lead manager shall agree to manage
or be associated with any issue unless his
responsibilities relating to issue mainly,
those of disclosures, allotment and refund
are clearly defined, allocated and
determined and a statement specifying
such responsibilities is furnished to the
Board at least one month before the
opening of the issue for subscription:
 General Obligations
9.Lead merchant banker not to associate with a
merchant banker without registration.
10.Underwriting obligations.
In respect of every issue to be managed, the lead
merchant banker holding a certificate under Category
I shall accept a minimum underwriting obligation of
five per cent of the total underwriting commitment or
rupees twenty-five lacs, whichever is less :
Provided that, if the lead merchant banker is unable
to accept the minimum underwriting obligation, that
lead merchant banker shall make arrangement for
having the issue underwritten
 General Obligations
11.Submission of due diligence certificate.
12.Document to be furnished to the Board.
The lead manager responsible for the issue shall furnish to the
Board, the following documents
1. Particulars of the issue;
2. Draft prospectus or where there is an offer to the existing
shareholders, the draft letter of offer;
3. Any other literature intended to be circulated to the investors,
including the shareholders; and
4. Such other documents relating to prospectus or letter of offer as
the case may be.
13.Payment of fees to the Board.
14.Continuance of association of lead manager with an issue.
15.Acquisition of shares prohibited.
 General Obligations
16.Disclosures to the Board
A merchant banker shall disclose to the Board as and
when required, the following information:
1. His responsibilities with regard to the management
of the issue;
2. The names of the body corporate whose issues he
has managed or has been ass0oiciated with;
3. The particulars relating to breach of the capital
adequacy requirement as specified in regulation 7;
4. Relating to his activities as a manager, underwriter,
consultant or adviser to an issue as the case may be.
 General Obligations
17.Appointment of Compliance
Officer
Every merchant banker shall appoint
a compliance officer who shall be
responsible for monitoring the
compliance of the Act, rules and
regulations notifications, guidelines,
instructions etc., issued by the board
or the Central Government and for
redressed of investors grievances.
 Procedure for Inspection
Boards right to inspect
The Board may appoint one or more persons as
inspecting authority to undertake inspection of the
books of account, records and documents of the
merchant banker
Notice before inspection to be given if necessary
board may order for inspection even without notice
Obligation of the merchant banker on Inspection
to produce books, accounts and other documents
as required by inspecting authority
The board may appoint a qualified auditor to check
the accounts
 Procedure for action incase of
default
Liability for action in case of
default.
A merchant banker who contravenes
any of the provisions of the Act,
Rules or Regulations framed
thereunder shall be liable for one or
more actions specified therein
including the action under Chapter V
of the Securities and Exchange Board
of India (Intermediaries) Regulations,
 Procedure for action incase of
default
Suspension of Registration
Violation of the provisions of the act
Fails to furnish information
Fails to resolve the complaints
Indulges in manipulating
Guilty of misconduct
Fails to maintain capital adequacy
Fails to pay fees
Violates conditions of registration
Does not carry out his obligations
 Procedure for action incase of
default
Cancellation of registration
Indulges in deliberate manipulation
If financial position deteriorates
Guilty of fraud
Repeated defaults
 Procedure for action incase of
default
Suspension or cancellation after
enquiry
Appointment of enquiry officer
Issue of notice
Reply within thirty days of notice
In case of suspension or cancellation
MB to cease to carry on any MB
activities
Appeal to Securities Appellate
Tribunal
 Fees
Every merchant banker shall pay a
sum of Rupees five lacs as
registration fees at the time of the
grant of certificate by the Board.
renewal fee of Rs.2.5 lacs every
three years from the fourth year from
the date of initial registration.
 Every Merchant banker shall pay registration fees as set
out below:
1. Category I merchant banker; A sum of Rs. 2.5 lakhs to
be paid annually for the first two years commencing from
the date of initial registration and thereafter for the third
year a sum of Rs. 1 lakh to keep his registration in force.
2. Category II merchant banker; A sum of Rs. 1.5 lakhs to
be paid annually for the first two years commencing from
the date of initial registration and thereafter for the third
year a sum of Rs. 50,000 to keep his registration in force.
3. Category III merchant bankers ; A sum of Rs.1 lakh to
be paid annually for the first two years commencing from
the date of initial registration and thereafter for the third
year a sum of Rs.25,000 to keep his registration in force.
4. Category IV merchant bankers ; A sum of Rs.5,000/- to
be paid annually for the first two years commencing from
the date of initial registration and thereafter for the third
year a sum of Rs.1000/- to keep his registration in force.
 Renewal Fees :
1. Category I merchant bankers : A sum of Rs.1 lakh to be
paid annually for the first two years commencing from the
date of each renewal and thereafter for the third year a
sum of Rs.20,000/- to keep his registration in force;
2. Category II merchant bankers : A sum of Rs.75,000/- to
be paid annually for the first two years commencing from
the date of each renewal and thereafter for the third year a
sum of Rs.10,000/- to keep his registration in force ;
3. Category III merchant bankers : A sum of s.50,000/ to be
paid annually for the first two years commencing from the
date of each renewal and thereafter for the third year a
sum of Rs.5,000/- to keep his registration in force ;
4. Category IV merchant bankers : A sum of Rs.5,000/- to
be paid annually for the first two years commencing from
the date of each renewal and thereafter for the third year a
sum of Rs.2,500/- to keep his registration in force ; In
addition, the merchant banker has to pay the following
fees towards documentation
 Size of the Issue Fee per Document (Rs.)
Up to 5 crores 10,000
More than 5 crores and up to 10 crores 15,000
More than 10 crores and up to 50 crores 25,000
More than 50 crores and up to 100 crores 50,00
More than 100 crores and up to 500 crores
2,50,000
More than 500 crores 5,00,000
 Companies Act 1956
If a Merchant banker is a company
registered under Companies Act
1956, all provisions of it is applicable.
 Provisions Under Companies
Act
The various regulations which govern the merchant bankers
on the capital issue are prescribed by the companies act,
and the other enactments mentioned below.
Provisions of the Companies Act, 1956
a. Prospectus (Sec. 55 to 68A)
b. Allotment (Sec. 55 to 75)
c. Commissions and discounts (Sec. 76 & 77)
d. Issue of shares at premium and at discount (Sec. 78 & 79)
e. Issue and redemption of preference shares (Sec. 80 & 80A)
f. further issues of capital (Sec. 81)
g. Nature, numbering and certificate of shares (Sec. 82 to 84)
h. Kinds of share capital and prohibition on issue of any other
kind of shares (Sec. 85 & 86)